An age old question often plagues the few individuals and families who have money saved but also carry around a significant amount of debt.
Which should you be more concerned with: paying off that debt or saving money? More specifically, as far as saving money goes, centers on your savings account and if you should pay off all your debt and have only a small amount of money saved.
Experts agree that your best bet is to focus on your debt, but with a few exceptions.
For starters, you have to get the big picture and make certain you’re not completely depleting your savings account to the point that you’re debt free, but can’t handle the uncertainty of a life event, should something occur that is going to cost money.
If you have $20,000 saved and $15,000 in debt, you shouldn’t pay off the entire sum of debt and leave yourself with only $5,000. That is too thin of a margin to work with, should the car need a transmission overhaul or the roof is badly in need of repair, something maybe that your homeowners insurance won’t cover.
You should follow a principle that focuses on a 50 to 50 split, so that $20,000 saved means you should take the $15,000 in debt and pay it down to $5,000 and thus leave yourself with about 10 grand left in your savings account.
So if you have that $5,000 left in debt, where exactly should you allot the other $10,000 when it comes to paying off that part of the debt, with the above example. The best decision is two fold: find the highest interest rates, and also your debt to credit limit ceiling. If you have an interest rate that teeters over the 20 percent mark (or at best 15 percent interest rate), that needs your undivided attention, quite frankly.
You should balance between the higher rate interest cards or lines of credit, but also remember that your credit score in negatively affected if you have maxed out most of your lines of credit. That $5,000 credit limit shouldn’t have $4,900 charged to it, so that amount of money you tend to spend on paying off (or down) your debt might serve your credit score better if that $4,900 balance is about half that amount.
Being smart with money isn’t just about budgeting or saving a certain amount of your paycheck for your savings account. Paying off debt is intelligent as long as it doesn’t leave you completely wiped out of your nest egg.
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